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Written Assignment - Unit 4

The document analyzes the costs associated with producing a product, calculating total direct costs, variable overhead, and product-specific costs to determine profitability. It concludes that producing the product in-house yields a profit of $4,575,000, while purchasing engines at $60 per unit would result in a loss of $75,000 in revenue. However, the potential opportunity cost of freeing up resources for other products may outweigh the financial losses from not producing the engines.

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8 views5 pages

Written Assignment - Unit 4

The document analyzes the costs associated with producing a product, calculating total direct costs, variable overhead, and product-specific costs to determine profitability. It concludes that producing the product in-house yields a profit of $4,575,000, while purchasing engines at $60 per unit would result in a loss of $75,000 in revenue. However, the potential opportunity cost of freeing up resources for other products may outweigh the financial losses from not producing the engines.

Uploaded by

kaponasalum
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Running head: Written Assignment – Unit 4 1

Written Assignment – Unit 4

University of the People

BUS 5110

Anonymous

5/7/2025
Written Assignment – Unit 4 2

Written Assignment – Unit 4

Current Costs to Produce

I am going to start by reorganizing the data provided by breaking down the monthly and annual

values into per-unit values. This will help us to get a clearer picture of the costs involved. First,

the monthly costs will be multiplied by 12 to give us the annual total for those costs, we can then

divide them by 50,000 to determine the costs per unit.

Direct Materials

$75,000 * 12 = $900,000

$900,000/50,000 = $18 per unit

Direct Labor

$100,000 * 12 = $1,200,000

$1,200,000/50,000 = $24 per unit

Total Direct Costs

$18 + $24 = $42 per unit

Variable Factory Overhead

$7.50 per unit

Fixed overhead is 150% of the direct labor costs per unit. This comes out at $36 per unit.

However, 75% of those $36 need to be spent regardless of whether we produce this product.

Therefore, we can deduct that 75% and add up the other values to determine our total costs

related to producing this specific product.


Written Assignment – Unit 4 3

Total Direct Costs and Variable Overhead

$42 + $7.50 = $49.5

Product Specific Overhead Costs

$36*.75 = $27

$36 - $27 = $9 per unit

Total Product-specific Costs

$49.5 + $9 = $58.5 per unit

Total Profit

$150 - $58.5 = $91.5 per unit

$91.5 * 50,000 = $4,575,000 annual

This means that this year we maintained $4,575,000 of the total $7,500,000 generated in revenue

as profit from this engine.

Should We Buy Engines Instead?

At $60 per unit to purchase, we would be losing money. It is approximately 2.5% more

expensive than producing the units ourselves and we would lose out on $1.50 of profit per unit.

If we applied that to this last year, it would account for $75,000 in revenue.

Percent Change (Kenton, 2024)

(60-58.5)/58.5 = 1.5/58.5 = 0.0256…

0.0256…*10 = ~2.5%
Written Assignment – Unit 4 4

Revenue Change

$150 – $60 = $90

$90*50,000 = $4,500,000

$4,575,000 - $4,500,000 = $75,000

Based on the numbers alone, the company should not buy the engines. However, there may be an

opportunity cost to producing them ourselves. By purchasing the engines, we free up resources

that can be used for the development and manufacturing of other products (Heisinger & Hoyle,

n.d.). This could significantly outweigh the losses associated with the change.
Written Assignment – Unit 4 5

References

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers.

https://2012books.lardbucket.org/books/accounting-for-managers/s11-how-are-relevant-

revenues-and-.html

Kenton, W. (2024). How to Calculate Percent Change.

https://www.investopedia.com/terms/p/percentage-change.asp

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